Taxwise: Property trusts treated as companies

By John Bassett

Q: I have been looking at investments on property unit trusts based in Australia. In the literature I have read I have come across vehicles described as "public trading trusts".

This seems to be important in relation to the trusts' tax status. Could yuo shed some light on what this might mean? A.S, Auckland.

A: You are correct in thinking that this status is relevant for taxation. For Australian income tax purposes a public unit trust that conducts a business is treated as if it were a company. As a consequence, profits of the trust are subject to the company tax rate of 36 per cent.

Distributions from the public unit trust to unitholders are treated as dividends to the recipient unitholder. That distribution would be taxed again in the hands of the unitholder with an allowance for any franking credits associated with the distribution.

In the case of a non-resident unitholder, the payment of full tax by the unit trust will result in the distribution being exempt from withholding tax.

Franking credits are like imputation credits and reflect tax paid by the unit trust on its profits.

The profits of a unit trust which is not a public unit trust do not face these two layers of tax. The tax bite is at the level of distribution to the unitholder.

There are exclusions from the public unit trust concept that are pertinent to the property field.

A unit trust that invests in land primarily for the purpose of deriving rent is not a public unit trust. On the other hand, activity as a land developer or dealer will result in public unit trust classification.

Naturally, there will be a different tax burden for each type of trust vehicle. For a public unit trust, profits could be taxed up to 57 per cent. This is made up of 36 per cent Australian tax and 33 per cent New Zealand income tax on the distribution of after tax profits.

For other unit trusts the tax should only be 33 per cent New Zealand income tax.

My understanding is that the capital gains tax treatment would be the same for both cases. A public unit trust would be subject to the tax as a taxpayer in its own right. In other cases a liability would arise if the trust's asset were land in Australia. Tax is at the standard non-resident rates, subject to an allowance for inflation in calculating the taxable profit.

* John Bassett is with the law firm Bell Gully.